Housing officials criticize 20% down-payment proposal

One of the leading Democratic lawmakers on housing policy and the Obama administration’s own housing agency criticized as too stringent an administration proposal that would push home buyers to come up with sizable down payments.

Under the plan, banks would have to retain a stake in the home purchase loans they make to borrowers who put down less than 20 percent. The banks say that the requirements would be costly and that those costs would be passed on to borrowers in the form of higher interest rates. That would effectively shut millions of families out of homeownership.

At a House subcommittee hearing Thursday, Rep. Barney Frank (D-Mass.) said the arguments against setting such a high threshold are “persuasive.” A 20 percent down payment “does seem very high,” Frank said.

Bob Ryan, acting commissioner of the Federal Housing Administration, agreed that the proposal has the potential to deny affordable loans to creditworthy borrowers. Ryan urged serious consideration of another option in the proposal that would set the down payment at 10 percent.

“We are definitely concerned about 20 percent and the impact,” Ryan said.

Since the proposal was unveiled last month, a coalition of consumer groups and civil rights advocates has joined the real estate industry to lobby against the high-down-payment initiative. They say saving the upfront cash is an especially tough hurdle for first-time buyers and minorities, who rely heavily on low-down-payment loans.

The six federal agencies involved in crafting the proposal — including the Federal Deposit Insurance Corp. and the Federal Reserve — will gather public comment on it through June 10. The plan would take effect a year after it is finalized.

But differences among the participating agencies surfaced at the hearing.

Ryan, whose agency is part of the Department of Housing and Urban Development, aligned himself with the 10 percent alternative. He argued that down payments alone are not the most reliable predictor of a borrower’s ability to sustain a loan, and he pointed to other factors, such as a borrower’s credit score. His agency insures low-down-payment loans and caters to low-income borrowers and first-time buyers.

But the Federal Housing Finance Agency — which oversees mortgage financiers Fannie Mae and Freddie Mac — analyzed loans sold to both companies from 1997 to 2009 and concluded that lowering the down payment to 10 percent would not greatly boost the share of loans exempt from risk retention.

The share of home purchase loans would have increased by just 5 percentage points, from 27 percent to 32 percent and those additional loans would have been riskier, Patrick Lawler, FHFA’s chief economist, told lawmakers.

Some consumer advocates reached similar conclusions. To buy a home for $172,100, the median national price, a borrower making a 10 percent down payment would have to come up with nearly $26,000, including closing costs, according to the Center for Responsible Lending. It would take a middle-income family about nine years to come up with the cash.

“Even a 10 percent down payment would put homeownership beyond the reach of many creditworthy families who would otherwise have succeeded in homeownership,” Ellen Harnick, senior policy counsel at the center, said in her testimony.